BACKGROUND ON HERBALIFE-RELATED BUSINESSES

Leslie Stanford is one of the owners of Success Connection, a business that sells training videos, recruiting scripts and other business tools to Herbalife distributors. These sales are separate from sales of products and related commissions between Herbalife and its distributors.

o HealthQuest International Inc. is registered in Colorado (Filing Number 19931143140, registration attached as Exhibit B). The registration filing also uses the address 6021 South Syracuse Way, Suite 100, Greenwood Village, CO 80111, and lists Stanford as the company’s registered agent. The articles of incorporation, attached as Exhibit C, list Stanford as the sole member of the company’s board of directors.

o HealthQuest International also operates using the trade name “Work From Home Now.” (Trade Name ID Number 19991160884, registration attached as Exhibit D.)

Leslie Stanford is also a member of the board of directors of WH Intermediate Holdings, Ltd., a subsidiary of Herbalife Ltd.

PRIMARY SOURCE DATA ON BUSINESS PRACTICES

Stanford and her family appear in videos promoting the Herbalife business opportunity.

o In one such video, available at https://youtu.be/JLtSZ5coVmE[2], Stanford tells potential recruits her supposed rags-to-riches story in order to encourage them to pursue the Herbalife business opportunity. She tells recruits that “you can be broke and start this business, because that was totally me.” (5:37 – 5:40.) (Later in the video she and her husband tell potential recruits that her initial investment was only $50. (8:49 – 9:05.))

o Stanford goes on to tell recruits that she made almost $2,000 in her first two weeks and $35,000 in her first year. Then, she tells recruits, she fully committed to the business, and made $400,000 the next year. “Now,” says Stanford, “I make millions.” (5:55 – 6:47.)

o The video features depictions of Stanford’s lavish home, as well as shots of Stanford’s entire family riding horses.

o In conclusion, Stanford assures potential recruits that “ten years from now, the people—there are people that haven’t even signed up yet that will be making a huge amount more money than we ever made in this company. I really do believe that.” (9:19 – 9:34.)

o Another video featuring Stanford, available to distributors at video.herbalife.com, and also available at https://youtu.be/cgonng12zNY, supposedly teaches distributors “how to get the most of the Herbalife marketing plan.” The video puts considerable pressure on distributors to qualify as a Supervisor as quickly as possible, and to pressure their downline distributors to do the same. Stanford tells distributors that “we’re spending a lot of time on supervisors because in my opinion that’s where the business really begins, because now instead of one or two areas of income you have several areas of income available to you.” (7:21-7:32.)

o Another Herbalife video featuring Stanford, available at https://youtu.be/a22f-lpgJYI, purports to introduce distributors to a “Marketing Plan Enhancement” in 2009. Specifically, the video explains Herbalife’s institution of the level of “Qualified Producer,” a level of the marketing plan between Distributor and Supervisor, which allows a new distributor to qualify as a Supervisor over a period of more than two months. (In practice, we believe this “enhancement” is merely a way for Herbalife to extract more money from aspiring distributors who could not afford an up-front investment of several thousands of dollars but who might be able to afford to put up the money over the course of time in order to qualify as a Supervisor.)

o After an introduction by Herbalife CEO Michael Johnson and presentations by a number of the most senior Herbalife distributors, including Susan Peterson, John Tartol, Geri Cvitanovich and others, the video features Stanford promoting the Herbalife business opportunity, telling distributors, “The momentum, the excitement, the opportunity. You can just feel it. It’s never been better than it is right now.” (10:41 – 10:48.) Stanford goes on to tell distributors to “[e]nvision your own future and you’ll be amazed at what you’ll be able to accomplish” and “[t]here are no limits to what you can achieve.” (10:52 – 11:06.)

o Addressing the change to the marketing plan, Stanford explains that “[i]t’s the same great, fantastic marketing plan we’ve always had, with more options for part time Distributors and those who haven’t met the one or two month qualification for Supervisor.” (11:17 – 11:27.) Stanford concludes, “It’s perfect for retention. Can you imagine if every Distributor took advantage of this? Retention would be off the charts.” (11:44 – 11:53.)

o In an older recording from 2006, available at https://soundcloud.com/hlfaudio/82106lesliestanford-1, Stanford encourages members to purchase a monthly service offered by Herbalife called BizWorks (which appears to have offered web registration services and other recruiting tools (15:54)). During that call, Stanford tells the story of a member of Herbalife’s Millionaire Team whose “check has slipped.” (31:14.) Stanford explains that this senior distributor successfully recruited other distributors into the scheme and exerted pressure on them to order large volumes of Herbalife products in order to qualify as a Supervisor immediately, but failed to pressure those new Supervisors to place similar pressure on their own downline distributors. In Stanford’s words, “she is getting distributors and she is getting them to Supervisor, but she is not getting duplication going . . . . She’s only got 6 supervisors doing over 2500 [volume points]. She needs a lot more than that to get her Millionaire Team check back again. She’s getting some new distributors but again, she is not getting duplication.” The concept of “duplication” appears throughout distributor recruiting materials and appears to be little more than a euphemism for pyramidal recruiting

Stanford also appears in videos promoting Success Connection.

o In one such video, available at https://youtu.be/PL5UShNw5no[3], Stanford tells recruits that “we have a plan here that shows you how you can make $120,000 in a year or $240,000 a year” and that “we have it up to [$]3.6 million for those of us who really like to dream big and think big.” (18:25-18:48.)

o Stanford also suggests that distributors may want to use lead generation to recruit new distributors into the scheme, and generally emphasizes the importance of “sponsoring a few people in the business.” (24:55 – 25:15.)

o Later in the same video, Stanford tells recruits that “[y]our total for the year is $120,000 if you have three generations of supervisors who have duplicated each other doing 2500 volume points per month, OK? Is that realistic? It is absolutely realistic.” (32:13-32:32.)

o In another video, available at https://youtu.be/zjkZ63VfOFQ, Stanford tells recruits her supposed rags-to-riches story and makes a series of extravagant income claims in promoting both Herbalife and Success Connection. Stanford tells recruits that during a difficult year for her personally, she “didn’t have to work” because of the “residual income” she earned with Herbalife. She tells recruits that “month after month after month my checks kept coming in the mail and supported me through that difficult time. . . . And I remember thinking, where else?” (3:13 – 4:43.)

o Stanford is joined in this video by senior Herbalife distributor and member of the Herbalife board of directors John Tartol, who is also one of the principals of Success Connection (see infra at 14). Stanford and Tartol swap stories and income claims, telling recruits that they are making millions with Herbalife and Success Connection.

Stanford: But I have to tell you, John, you know, did you—would you have ever guessed in a million years that we’d be making millions in this?

Tartol: Never Leslie, it’s unbelievable.

(5:45 – 5:53.)

Success Connection provides its members with a variety of training materials, recruiting scripts and other business tools through the website http://www.scbizcentral.com/

Training Calls

Stanford conducts frequent training calls for Success Connection, in which she helps members develop a “recruiting plan” to recruit new distributors into the scheme, pushes members to rise as quickly as possible in the Herbalife marketing plan (in part by ordering large volumes of Herbalife products), and promotes Herbalife events and business tools.

o A list of links to recent training calls from the Success Connection website is attached as Exhibit G, and the calls featuring Stanford are available at the links below:

o In one such call, entitled “How to keep your business going during the lazy days of summer,” available at http://successconnection.com/calls/060412.wav, Stanford encourages Success Connection members to go with their children to summer activities like sporting events in order to give out free products and talk to other parents and attendees about the Herbalife business opportunity. Stanford further tells members to focus their recruiting efforts on schoolteachers and recent college graduates who have been unable to find a job. Referring to recent college graduates, Stanford tells members, “These kids are desperate. And it’s up to us to go out there and find those kids.”

o In a Success Connection training call from 2009, available at https://soundcloud.com/hlfaudio/4272009lesliestanford, Stanford announces to members that Herbalife has opened in Vietnam, and generally explains to members how to recruit new distributors internationally. Stanford’s statements on this call demonstrate that in many cases Herbalife “sponsors” are not coaches or mentors at all, but are simply higher-level distributors who have mastered online recruitment. Indeed, Stanford tells members, “I get royalties or bonuses from over 65 countries every month . . . and I’ve never even been to a lot of those countries. So does anybody want to find out how to get international business?” (4:35.) Stanford also tells members that “[t]he time has never been better to get global business than it is right now, because of the internet.” (7:41.)

Recruiting Materials

The Success Connection website provides a number of recruiting tools for its members:

Among other things, the Success Connection website provides its members with a variety of recruiting scripts for use in various stages of the recruitment process.[4]

o One such script, attached as Exhibit H, is designed for members to use when calling a potential recruit either to confirm the recruit’s attendance at an Herbalife Opportunity Meeting (“HOM”) or to follow up after the recruit missed an HOM. The script guides members to tell potential recruits that at the HOM, the recruit will be provided with “the details of earning $500 to $1500 or 2 to $4000 part-time or full-time Working Right From Home.”

o Another script, attached as Exhibit I, is designed for members to use in conducting a three-way call with a member of their upline and a potential recruit. The script instructs members to tell the potential recruit “your income testimonial” and to provide specific dollar figures. The script also encourages members to ask potential recruits “if they want to build their business FAST or SLOW” and tells members that if the potential recruit is “interested in the business, sign them up on the same call and get their product order and their cash.”

o Another script, attached as Exhibit J, helps members package their own “income story” and guides members on how to present it to potential recruits. The script encourages members to “[t]ell your first day/week/month profit: whichever is best.”

o Another script, attached as Exhibit K, instructs members to ask potential recruits “6 serious questions which will determine if a home-based business is right for you,” but after asking those questions—such as “On a scale from 1-10, how serious are you about learning how to run a home-based business and earning money at home”—and regardless of the potential recruit’s answers, the script directs the member to proceed to telling the potential recruit “your 30 second income story, and 30 second sponsor’s income story, if necessary.” The script goes on to direct the member to send the potential recruit an Herbalife video, with an accompanying note offering to “discuss your next step towards having more freedom in your life.”

o Another script, attached as Exhibit L, encourages members to tell potential recruits the following with respect to the Herbalife business opportunity: “Well we’ve been in business for over 30 years, we operate in over 70 countries and do aproximately [sic] $4 billion worldwide in business. We don’t do cold calls, door to door sales or telemarketing. We need help with servicing customers and supervising and training reps. Full training will be provided.”

o Another script, attached as Exhibit M, instructs new members to call their friends and ask for a “favor.” In particular, the script instructs new members to tell their friend that “I just got started in a new business and I’m in the process of getting trained. Part of my training is to listen to my new Supervisor talk to people about my new business so I can listen and learn from that experience.” The new member and his or her Supervisor then both attempt to convince the friend to attend an HOM.

Website Registrations

Success Connection registers Herbalife recruiting websites for its members, and provides those members with the tools to build a website promoting the Herbalife business opportunity as well as Success Connection. A list of domains registered by Success Connection is attached as Exhibit N.

One such domain, cashincomenow.com, featured deceptive income claims and pictures of hundred-dollar bills, promised “financial freedom” and the ability to “work and live where you want, when you want,” and assured potential recruits that “[r]egardless of your Background… Surely you’ve thought…There has to be a better, simpler way. There is… and we’ll show you!”

Presentations, Guides and Other Business Tools

The Success Connection website provides members with a variety of guides and presentations that encourage them to qualify as a Supervisor as quickly as possible (and push their downline distributors to do the same), and generally emphasize the importance of recruiting new distributors into the scheme.[5]

o One such guide, attached as Exhibit O, shows members how to work together in small groups and use the “PiggyBack” or “Buddy Method” to pool resources in order to qualify immediately for Supervisor status.

o One presentation, attached as Exhibit P, promotes a business development system developed by Herbalife called “Get 20 Keep 20!”[6] That presentation tells members they can earn $511,500 a year by recruiting new distributors into the scheme and pressing them to qualify as Supervisors immediately.

o Another presentation, attached as Exhibit Q, tells members that they can earn $523,500 by recruiting five Supervisors, or $3.7mm by recruiting ten Supervisors. The presentation flatly states, “Again the key to this business is duplication.”

Links to Other Senior Distributors

Leslie Stanford runs Success Connection along with John Tartol and several members of his family.

o The Success Connection articles of incorporation, attached as Exhibit S, list the Members of the company as HealthQuest International Inc. (which is registered to Stanford), as well as Tartol Enterprises, Herbal Way Incorporated and J&N Management Consulting.

o Tartol Enterprises is registered in California (Entity Number C1211241, filed 9/16/83, registration attached as Exhibit T) to senior Herbalife distributor and member of the Herbalife board of directors John Tartol.

o Herbal Way Incorporated, which was incorporated in Illinois but is currently based in Texas, is registered to Tartol’s sister Mary Hollaway. (Texas SOS File Number 0800430702, filed 12/17/04, registration and tax account status attached as Exhibit U and Exhibit V.)

o J&N Management Consulting is registered in Massachusetts (ID Number 042876156, filed 06/20/85, registration attached as Exhibit W), and is operated by Tartol’s brother Jim Tartol and his wife Nancy.

Stanford is also the registrant of the website JohnTartol.com. (An IP look-up is attached as Exhibit X.)

Stanford was in Shawn Dahl’s upline.

o When Dahl resigned from Herbalife in June 2013, Herbalife organized a conference call for distributors at or above the level of GET Team in Dahl’s organization in the United States and Canada. (Herbalife Announcement attached as Exhibit Y.) Stanford participated in that call. See https://soundcloud.com/hlfaudio/conferencecall-6-24-13-low. During that call, Ibi Fleming, Herbalife’s Senior Vice President and Managing Director for North America, told distributors, “while Chairman’s Club member Shawn Dahl has resigned his distributorship, you do have support from your upline Founder’s Circle member, Leslie Stanford, and your upline Chairman’s Club member Blake Morgan who are on the call as well.” (4:31.) Stanford then told the distributors, “I’m really sad for what brought us to this call, it’s difficult to see Shawn go and we wish him well, but at the same time I’m really happy and excited at the thought of getting to know some of you better and to work with you.” (6:22.) After a brief presentation by Blake Morgan, Stanford and Morgan turned the call over to President’s Team member Cynthia Robinson, who told distributors that they could continue to use OBS if they downgraded their memberships).

o Stanford had previously appeared on a training call for Online Business System (“OBS”), an online recruiting and lead generation business run by Dahl, along with Herbalife CEO Michael Johnson. See https://youtu.be/YEymHOcIevA.

o Stanford has a large presence in Canada. Indeed, in a November 2009 Success Connection training call announcing Herbalife’s launch in Vietnam, available at https://soundcloud.com/hlfaudio/4272009lesliestanford, Stanford said, “I have 8 Chairman’s Club members in my organization and I can trace all 8 of those CC lines to Calgary, Canada.” (17:58.)

We also believe that Stanford is in Karen DeSaegher’s upline, and that the DeSaeghers refer to Stanford’s success in their own recruiting efforts.

Stanford appears at Success Connection events with other senior Herbalife distributors. For example, Stanford appeared at a Success Connection event in October 2010 with senior Herbalife distributor Kellie Hosaka, who is based in Hawaii.

Stanford also frequently appears at Herbalife events with other senior Herbalife distributors.

LINKS TO HERBALIFE CORPORATE LEADERSHIP

Stanford served on Herbalife’s board of directors from 2002 to 2005. See Herbalife Ltd Form Def 14A filed with the Securities and Exchange Commission September 27, 2005, attached as Exhibit Z.

o According to that filing, as of September 16, 2005, Stanford beneficially owned 1,333,477 shares of Herbalife stock.

Stanford is a featured speaker on Herbalife’s Chairman’s Club Tour, and appeared at Herbalife-sponsored events as recently as December 2013.

In 2011, when Stanford qualified for the Founder’s Circle, Herbalife distributed a flyer congratulating her and also featured her on the cover of Herbalife Today, a magazine published by Herbalife.

o Note that Stanford states: “I love seeing people succeed against all odds,” suggesting that any disclaimers will not constrain those who are committed.

In 2010, the Herbalife Family Foundation awarded Stanford its Humanitarian Award, which is given to distributors who “exemplify the foundation’s mission and, through their outstanding involvement and dedication, have made a significant contribution to changing people’s lives through service in their community.” See http://www.herbalifefamilyfoundation.org/page.aspx?pid=421.

Stanford also attended the Founder’s Circle and Chairman’s Club Retreat in Australia in November 2013.

In 2004, Stanford, along with a number of other senior distributors, was a featured “Star” at the Herbalife University, an Herbalife event in which senior Herbalife distributors purportedly train new distributors. Herbalife announced in promoting the event that Stanford had “made MILLIONS working from home!”

Other Businesses

Stanford is the general manager of HealthQ Nutrition, an Herbalife nutrition club located in Greenwood Village, Colorado.

o We believe HealthQ Nutrition is run on a day-to-day level by an Herbalife distributor named Scott Hornick.

Stanford’s husband Don Bailey registered Triton Investment Company in Colorado in December 1998 (ID Number 19981214931, registration attached as Exhibit AA). The registration uses the address 6021 South Syracuse Way, Suite 100, Greenwood Village, CO 80111. In addition, the most recent filings for Succession Connection and HealthQuest International list Crystal O’Fee of Triton Investment Company as the “individual causing the document to be delivered for filing.” See Exhibit BB and Exhibit CC. O’Fee is also listed on Triton’s most recent filing. See Exhibit DD.

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